Statement by His Excellency
Mohamed K. Khirbash
Minister of State for Finance and Industry
Ministry of Finance and Industry, United Arab Emirates
International Monetary and Financial Committee Meeting
Washington D.C., September 28, 2002

The increasing uncertainties surrounding prospects for the world economy
since the IMFC met last spring point to the need for coordinated and cooperative
economic policies on the part of the world community. The recovery of
the U.S. and most of the European economies, particularly the major ones,
appears to be stalling, the situation in Japan remains difficult, and
emerging market and developing countries have in turn been buffeted by
global uncertainties reflected in weakened demand, a sharp drop in private
capital inflows, and a continuing decline in commodity prices. Furthermore,
what appears to be a sense of unease regarding the basic underpinning
of the global financial framework may be growing, imparting a sense of
malaise on the part of consumers and investors worldwide.

In the United States, following the excesses of the 1990s which
were reflected in a continuously rising current account deficit and an
unprecedented asset price boom, particularly in the stock market, economic
growth began to slow down in early 2000 as a process of correcting the
excesses set in. The unfortunate events of September 2001 aggravated the
slowdown and heightened the uncertainties. More recently, the economy
has been buffeted by at least two major developments that are clouding
the outlook. The first is the crisis of confidence associated with the
high-profile corporate ethics transgressions, which appears to have accelerated
the sharp fall in equity markets and to have affected private domestic
demand and corporate investments. The second concern relates to the recent
fiscal expansionary policy which has yet to be accompanied by the adoption
of a medium-term framework for fiscal consolidation. While supportive
macroeconomic policies have, no doubt, helped sustain the economy's still
incipient recovery, the questions surrounding the course of fiscal policy
over the medium term are adding to uncertainties with regard to future
macro stability and to the increasingly cautious attitude of economic
agents. The recently heightened risk of the outbreak of military action
has compounded economic uncertainties in the United States and, indeed,
in many other parts of the world.

Regrettably, the economic outlook has also become more cloudy in the
other two major currency areas, namely Japan and Europe where it
had been hoped that a strengthening of growth would, at least partially,
compensate for a slowing of the U.S. economy in the period ahead. In Japan,
the pursuit of expansionary macro policies alone has not been successful
at reviving economic activity or preventing successive recessions. While
a modest pickup in activity is projected, there are also serious downside
risks to the outlook. In Europe, fragile global conditions and weak domestic
demand combined with the persistence of structural rigidities, particularly
in major countries, are hampering the anticipated overall recovery. Notwithstanding
the strengthening of the euro vis-à-vis the dollar, large global
imbalances persist. The risk of a sudden unwinding of these imbalances,
which are not likely to be sustainable for long, and of a disruptive adjustment
of major exchange rates, presents a serious risk to the global economy.
Assuring an orderly and gradual unwinding of these imbalances is the responsibility
of both the major deficit and surplus countries and both need to pursue
policies that would promote an orderly adjustment. We, therefore, concur
with the view that macroeconomic policies in most industrial countries
will need to remain accommodative for longer than had been expected earlier
in the year, with special emphasis on the surplus countries. A more vigorous
and sustained implementation of structural reforms, be they in labor and
product markets in Europe or banking and financial sector reform in Japan,
as well as a significant strengthening of corporate accounting regulation
in the United States, is also needed to raise these countries' medium-term
growth potential. Given their pivotal roles in the global economy, the
major industrial countries are also called upon to do considerably more
to promote stronger growth in other parts of the world, most notably by
accelerating the implementation of their commitments with regard to opening
their markets to developing country exports. Decisive and timely action
in this area is urgently needed.

While important progress has been made in many developing countries
in strengthening their macroeconomic frameworks and in structural reforms,
prevailing global demand conditions have, nonetheless, had a generally
negative impact on growth in the developing world. Growth in Africa weakened
over the past year largely as a result of the decline in commodity prices,
as well as severe drought conditions. In Latin America, adverse developments
in international financial markets, compounded by political uncertainties,
resulted in a deterioration of economic conditions in a number of countries.

Our region of the Middle East has also, to varying degrees, experienced
a rather tumultuous year associated with both the deteriorating regional
situation as well as the sharp drop in global economic activity, which
contributed to weak oil demand and sharply reduced tourism receipts. Apart
from the heavy toll on human life and suffering, it is well to note that
the rebuilding of the Palestinian economy, which has been totally devastated,
will take many years and much assistance from the international community.
Furthermore, all over the region, policy formulation has clearly been
encumbered and shaped by the security situation and the associated political
atmosphere prevailing in the region. As a result, in many countries, growth
slowed down from the high levels of the previous year. However, average
growth was 4.2 percent of GDP in 2001, above the average rates recorded
for the vast majority of developing countries.

The Fund and the International Financial System in the Process of
Reform

Surveillance and Crisis Prevention

The sharp decline in private capital flows to developing countries over
the past year has focused attention on the risks inherent in increased
global financial market integration, notwithstanding some improvement
in investor differentiation among recipient countries. Given the increased
frequency and the severity of financial market crises over the past decade,
it is incumbent on the Fund to review its policy advice to developing
countries on capital account liberalization. For one thing, a serious
evaluation of the costs and benefits of short-term flows to the economies
of developing countries is called for. Furthermore, a careful study of
the appropriate sequencing of capital account liberalization with, not
only a strengthening of the domestic financial sector, but also with trade
liberalization, is needed. Here, I refer to trade liberalization in both
the country concerned as well as in major industrial country markets.
It cannot be ignored that too many of the countries that suffer a severe
debt crisis when capital inflows dry up for one reason or another, are
faced with the monumental task of trying to meaningfully increase their
exports to deal with their BOP problem, only to find that the largest
markets remain virtually closed to the products in which they are competitive.
Until developing country access to industrial markets is significantly
enhanced, the Fund's policy advice should realistically reflect the current
state of affairs that developing countries continue to face today. It
is not helpful for the Fund to repeat the mantra that global financial
integration would increase international trade flows significantly and
that trade and financial integration tend to reinforce each other. Experience
has shown that financial market liberalization, particularly with regard
to short-term capital, has become a very risky proposition for developing
countries, especially when they are not already strong exporters. We had
repeatedly expressed our serious concern on this aspect prior to the outbreak
of the Asian crisis in 1997.

It follows from the above, that trade issues should be given much
more prominence in Fund surveillance of industrial countries. The
Fund already plays a prominent role in promoting trade liberalization
in developing countries through its policy advice in the context of Fund-supported
programs and bilateral surveillance. However, the incorporation of policy
advice and analysis on barriers to trade in Article IV consultations with
the industrial countries, remains perfunctory. We are, therefore, pleased
to note that the Fund is in the process of refocusing its surveillance
to provide more detailed and critical analyses of trade policies in industrial
countries. Explicit coverage of the costs both to the domestic economy
and globally of trade restrictions and subsidies should be included. We
hope that an increased awareness of the magnitude and distribution of
the domestic costs of trade barriers in advanced countries, will lead
to faster progress in their removal. We fully support the Managing Director's
strong advocacy of trade liberalization that would meaningfully benefit
developing country exports.

Crisis resolution

We strongly support the Fund's efforts to temporarily provide members
in crisis with adequate financial resources in support of strong adjustment
and reform programs, based on rigorous sustainability analysis. We support
the strengthened policy framework for exceptional access to the Fund's
resources agreed to by the Executive Board. Nevertheless, it is well to
note that experience has clearly shown that the terms and maturities of
the Supplemental Reserve Facility (SRF) may at times exacerbate the difficulties
of countries in severe crisis, pointing to the need for an expeditious
review of the SRF framework to make it more responsive to the needs of
countries.

We support Fund efforts aimed at establishing a sovereign debt restructuring
mechanism (SDRM) that, in cases of unsustainable sovereign debt, would
provide the legal basis for a more rapid, orderly, and predictable restructuring
of a sovereign's debt to private external creditors. In moving this process
forward, it will be crucial to balance carefully the views of sovereign
borrowers and the private sector and to consult extensively with all parties
concerned. While we hope that, at the same time, greater use will also
be made of collective action clauses in sovereign bonds, we would stress
that the most effective way to promote their greater use would be by regulatory
action in major financial centers.

The Low-Income Countries -HIPC Initiative, PRGF, and PRSP Approach

The international community has reaffirmed its commitment to cooperative
and collective action to eradicate poverty and promote higher standards
of living in developing countries, particularly the low-income countries,
in the Financing for Development Conference in Monterrey. The onus is
now on all countries, particularly the major industrial countries, international
financial institutions, and the developing countries themselves, to proceed
with a sense of urgency in the implementation of those commitments. Appropriate
domestic policies focused on poverty alleviation and the acceleration
of growth must be the focus of the countries concerned. In turn, the international
community should be forthcoming in translating into action its commitments
to increase concessional aid, enhance market access for developing country
exports, and provide adequate technical assistance.

We welcome the continued progress being made under the enhanced HIPC
Initiative in providing debt relief to the world's poorest countries.
On the issue of debt sustainability, we note that debt indicators for
many HIPC countries have worsened relative to decision-point projections,
mainly as a result of the downturn in global economic conditions and depressed
commodity prices. We hope that the flexibility provided in the Initiative
will be utilized to provide additional debt relief at the completion points,
as needed, based on a case-by-case review. It is also well to note here
that debt relief is only one of many elements required to ensure a lasting
exit from unsustainable debt. In addition to implementing prudent macroeconomic
and borrowing policies, expanding the export base of these countries is
essential to reduce their vulnerability to external shocks. In this regard,
continued efforts by the industrial countries to open their markets to
the exports of poor countries are welcome. This should, of course, be
complemented by the provision of the necessary technical and marketing
support to enhance their capacity to export. The donor community also
has a key role to play by ensuring that timely and adequate financial
assistance is channeled to poor countries.